Life Support - Tax Facts
Eight Ways to Avoid an Audit
A Tax Fact from The Tax Institute at H&R Block
No one wants to receive a visit from the IRS. Follow these eight pointers, and you're sure to lessen the odds that you'll find them standing on your stoop.
It could be called a dirty word - all five letters of it. Audit is a word no one wants to hear let alone breathe. However, there are a few steps you can take to protect yourself and decrease the chances you'll become one of the chosen few. Here's a quick checklist to see if you're in the clear.
1. Cross your t's and dot your i's - The easiest way to avoid an audit is to ensure your return is accurate. The best way to do that - have it prepared by a certified tax professional who knows your situation. Now this may seem like common sense - a few mathematical errors alone won't get you into trouble - but several mistakes can imply that your return is a sloppy one and in need of a second look.
2. How you generate income does matter - There are also certain professions that attract more scrutiny. For example, those who are self-employed or receive large amounts of cash (like servers and taxi drivers, for instance) are always at risk for an audit as opposed to those who receive a steady salary. Since the IRS already believes that most under-reporting occurs among the self-employed, they are on the lookout for red flags, such as taking home office deductions. It's important to weigh the risks. You can talk to your tax professional about the best option for you.
3. Alimony is not free and clear - Not reporting taxable alimony payments received can cause big trouble. The IRS now matches deductions for alimony from one spouse with the alimony income reported by the other.
4. Be accountable for automobile logs - One of the most commonly audited items are automobile logs for self-employed persons or employed individuals using their cars for business purposes. The key to protecting yourself here is to keep detailed records of your mileage on a daily basis, if possible. Try to keep a log that charts the beginning and ending odometer readings, location and reason for the trip. Your tax professional can then help you determine how much of those miles qualify for business use.
5. Limit itemized deductions - Large amounts of itemized deductions can make you a likely target for an audit. Even though you should claim every deduction you're entitled to by law, making tax deductions that exceed the averages for your income can put you at risk. Taxpayers should be aware of the important recent tax law changes affecting charitable contributions. For example, to deduct any charitable donation of money, a taxpayer must have a bank record or a written communication from the charity showing the name of the charity and the date and amount of the contribution. For payroll deductions, the taxpayer should retain a pay stub, Form W-2 wage statement or other document furnished by the employer showing the total amount withheld for charity, along with the pledge card showing the name of the charity.
6. High DIF can hurt you - When you file your return with the IRS, they use a proprietary formula to calculate your Discriminate Information Function (DIF) score. Returns with the highest DIF scores are the most likely to be selected by the IRS because they pose the best chance for the IRS to collect additional taxes, interest and penalties. The best way to avoid a high DIF: Make sure to report all taxable income - from interest earned on your bank accounts to interest earned on investments.
7. Avoid offshore credit cards - An estimated one million Americans have offshore credit cards. And the IRS is taking notice. People put money in an offshore account to avoid paying taxes on the interest. It may seem like a good idea, but it's really only a great way to volunteer for an audit.
8. Take care when selling stocks or bonds - The IRS receives a 1099 form noting the sale price of your stocks or bonds. So it's best to claim capital gains in full and back out your purchase price on another section of your return. For example, if you buy stock for $2,000 and sell it for $5,000, you may think it makes sense to claim only $3,000 in capital gains. However, this will throw up a red flag. Instead, claim the full $5,000 and back out the $2,000 purchase price somewhere else on your return. A tax professional can help you complete your return accurately to avoid any mistakes.
This Tax Fact is brought to you by The Tax Institute at H&R Block.
To view other helpful tax information or listen to our Tax Fact podcasts, visit www.digits.hrblock.com
As always...everyone's tax situation is different, so be sure to consult a tax professional or financial advisor before making important financial decisions.
This Tax Fact is for educational purposes only and is not intended to be a substitute for seeking personalized, professional advice, nor is it intended to be used to avoid IRS penalties.
A Tax Fact from The Tax Institute at H&R Block
No one wants to receive a visit from the IRS. Follow these eight pointers, and you're sure to lessen the odds that you'll find them standing on your stoop.
It could be called a dirty word - all five letters of it. Audit is a word no one wants to hear let alone breathe. However, there are a few steps you can take to protect yourself and decrease the chances you'll become one of the chosen few. Here's a quick checklist to see if you're in the clear.
1. Cross your t's and dot your i's - The easiest way to avoid an audit is to ensure your return is accurate. The best way to do that - have it prepared by a certified tax professional who knows your situation. Now this may seem like common sense - a few mathematical errors alone won't get you into trouble - but several mistakes can imply that your return is a sloppy one and in need of a second look.
2. How you generate income does matter - There are also certain professions that attract more scrutiny. For example, those who are self-employed or receive large amounts of cash (like servers and taxi drivers, for instance) are always at risk for an audit as opposed to those who receive a steady salary. Since the IRS already believes that most under-reporting occurs among the self-employed, they are on the lookout for red flags, such as taking home office deductions. It's important to weigh the risks. You can talk to your tax professional about the best option for you.
3. Alimony is not free and clear - Not reporting taxable alimony payments received can cause big trouble. The IRS now matches deductions for alimony from one spouse with the alimony income reported by the other.
4. Be accountable for automobile logs - One of the most commonly audited items are automobile logs for self-employed persons or employed individuals using their cars for business purposes. The key to protecting yourself here is to keep detailed records of your mileage on a daily basis, if possible. Try to keep a log that charts the beginning and ending odometer readings, location and reason for the trip. Your tax professional can then help you determine how much of those miles qualify for business use.
5. Limit itemized deductions - Large amounts of itemized deductions can make you a likely target for an audit. Even though you should claim every deduction you're entitled to by law, making tax deductions that exceed the averages for your income can put you at risk. Taxpayers should be aware of the important recent tax law changes affecting charitable contributions. For example, to deduct any charitable donation of money, a taxpayer must have a bank record or a written communication from the charity showing the name of the charity and the date and amount of the contribution. For payroll deductions, the taxpayer should retain a pay stub, Form W-2 wage statement or other document furnished by the employer showing the total amount withheld for charity, along with the pledge card showing the name of the charity.
6. High DIF can hurt you - When you file your return with the IRS, they use a proprietary formula to calculate your Discriminate Information Function (DIF) score. Returns with the highest DIF scores are the most likely to be selected by the IRS because they pose the best chance for the IRS to collect additional taxes, interest and penalties. The best way to avoid a high DIF: Make sure to report all taxable income - from interest earned on your bank accounts to interest earned on investments.
7. Avoid offshore credit cards - An estimated one million Americans have offshore credit cards. And the IRS is taking notice. People put money in an offshore account to avoid paying taxes on the interest. It may seem like a good idea, but it's really only a great way to volunteer for an audit.
8. Take care when selling stocks or bonds - The IRS receives a 1099 form noting the sale price of your stocks or bonds. So it's best to claim capital gains in full and back out your purchase price on another section of your return. For example, if you buy stock for $2,000 and sell it for $5,000, you may think it makes sense to claim only $3,000 in capital gains. However, this will throw up a red flag. Instead, claim the full $5,000 and back out the $2,000 purchase price somewhere else on your return. A tax professional can help you complete your return accurately to avoid any mistakes.
This Tax Fact is brought to you by The Tax Institute at H&R Block.
To view other helpful tax information or listen to our Tax Fact podcasts, visit www.digits.hrblock.com
As always...everyone's tax situation is different, so be sure to consult a tax professional or financial advisor before making important financial decisions.
This Tax Fact is for educational purposes only and is not intended to be a substitute for seeking personalized, professional advice, nor is it intended to be used to avoid IRS penalties.
